iFonetec released an application for the iPhone, called “VideosTone”, which logically adds support for video ringtones. It can be found in the Installer after the http://app.ifonetec.com source is added. Once installed, you’ll be able to activate it in the settings menu and set the video clip to be used for notifications. The site also gives instruction on how to convert videos for best results as a ringtone.
Unfortunately, the option to add video ringtone to a contact is available in the advanced version only, which comes at a fee. Also, the free one isn’t bug free and if you don’t answer and incoming before the network disconnects the caller, the music will go on (although the video will be hidden). This will either freeze the phone or it will not display the video in following calls (to alleviate this issues, a restart is required).